PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

23 June 2010

1 Japan Pledged To Balance Its Budget In 10 Years To

Curtail the Country’s Debt

2 US Existing Home Sales Fell In May

3 China Sent A Signal That The Renminbi Is Not A One-

way Bet

4 South Korea To Restrict Foreign-Currency Loans To

Overseas Use

Tracking The World Economy...

Today’s Highlight

Japan Pledged To Balance Its Budget In 10 Years To Curtail the Country’s Debt

Japan’s government pledged to balance its budget in 10 years and reduce bond sales in a move to bolster investor
confidence that it is working towards containing its debt, the world’s largest public debt. The plan calls for balancing the
budget, excluding interest payments on bonds, by the year ending March 2021. Japan said that it planned to cap annual
spending at ¥71 trn yen (US$781bn) over the next three years and tax changes will be unveiled soon. Under the
proposed plan, ministries will follow a “pay-as-you-go” principle when compiling the budget, meaning policymakers must
secure funds before seeking extra spending. The government last week also indicated that it is considering increasing
the country’s 5% sales tax to enhance its revenue.

The plan announced on 22 June comes less than a week after the government released a plan to end deflation and
achieve faster growth. The government aims to achieve real GDP growth of 2% a year over the next 10 years, a rate
that exceeds the 1.1% average expansion since 1990, by lowering corporate tax and nurturing business in areas such
as the environment and health care.

Nonetheless, Fitch Ratings and Standard & Poor’s said the plan lacked details on how the government will achieve its
goals. The Fitch Rating said that Japan’s fiscal strategy released on 22 June has yet to demonstrate to it that the country
is on a path toward curtailing its debt. Standard & Poor’s said that while the strategy is better than nothing, the country’s
credit quality is still eroding slowly and it would be difficult to earn investors’ confidence with the plan. Standard & Poor’s
maintained its “negative” outlook on Japan’s AA credit rating.

Japan racked up its debt, as it tried to spend its way out of economic stagnation and deflation following the bursting of
an asset-price bubble 20 years ago. The country’s borrowings are approaching 200% of GDP, the highest ratio among
the developed countries.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 23 June 2010

The US Economy

Existing Home Sales Fell In May

◆ US existing home sales fell by 2.2% mom or at an annual rate of 5.66 million units in May, after rising
by 8.0% in April. This was the first decline following two consecutive months of strong pick up, indicating that
buyers took a pause after rushing to sign contracts by the end of April and complete deals by the end of June
in order to qualify for the government’s tax credit incentive of as much as US$8,000. Yoy, the existing home sales
slowed down to 19.2% in May, from +23.2% in April, pointing to a slight weakness in home sales. Notwithstanding
a drop in existing home sales, the supply of new homes for sales ease marginally to 8.3 months of stocks in May,
from 8.4 months of stocks in April. Meanwhile, the median existing home prices inched up by 4.2% mom in May,
compared with +1.6% in April. Yoy, the median prices of existing homes moderated to 2.7% in May, from +3.5%
in April, indicating that house prices remained weak. As a whole, the expiry of the government’s tax incentive
will likely affect home sales somewhat in the next few months and a recovery in the housing market will likely
be slow.

Asian Economies

China Sent A Signal That The Renminbi Is Not A One-way Bet

◆ China’ renminbi closed at RMB6.8136/US$ on 22 June or 0.23% lower than the close a day ago when the
currency rose by 0.43% to RMB6.7976, the strongest level since the currency has been regularly traded. Investors
said the two days of roller-coaster movements in the renminbi reinforce the People’s Bank of China’s goals to show
that market trading will drive the exchange rate, and to show that the exchange rate can move both ways, in order
to deter speculators from piling into the renminbi. The government worries that if the renminbi’s steady rise is
seen as a one-way bet it will trigger massive inflows of such speculative capital or hot money that could disrupt
China’s efforts to manage its economy. Meanwhile, the People’s Bank of China set the daily rate at RMB6.7980/
US4 yesterday, indicating that an appreciation of the renminbi will likely be gradual. Separately, the 12-month non-
deliverable renminbi forward climbed 0.5% to RMB6.6095/US$, implying that traders expect the renminbi to
rise by 2.9%.

South Korea To Restrict Foreign-Currency Loans To Overseas Use

◆ South Korea will stop banks from giving foreign-currency loans to local companies for domestic use
starting 1 July, as part of measures announced this month to reduce volatility in capital flows and the won. The
Bank of Korea, however, will allow banks to roll over existing foreign-exchange loans and give new credit only for
small companies that can’t raise funds overseas. Foreign-currency loans in South Korea rose by US$2.19bn over
the first four months of this year to US$44.53bn. Earlier, it announced on 13 June that it would limit the foreign
lenders’ positions in foreign-exchange forwards, options and swaps to 250% of equity capital, a goal that must be
met within two years. South Korea said that it plans to further tighten a limit on foreign banks’ usage of currency
derivatives. It joins nations from Taiwan to Russia in tightening rules on capital flows to limit swings in their
currencies. Meanwhile, the country’s short-term external debt totaled US$154.6bn at the end of March, accounting
for 57% of all overseas borrowings. At the end of 2008, short-term debt accounted for 75% of the total.

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